Two Percent ‘Makes Sense’ as Central Banks Fight Low Inflation

  • Mishkin says policy makers shouldn’t be afraid to overshoot
  • Borio says more tightening acceptable to tame financial booms

Central banks’ mandates may not have to change, but more flexibility is needed in interpreting them.

That’s the conclusion of a panel in Vienna on whether a 2 percent inflation target is still appropriate after years of financial crises have eroded growth potential around the world and policy makers have taken on additional tasks beyond guaranteeing price stability. Some warned that demonizing deflation might lead to the creation of new bubbles.

A quarter of a century since New Zealand opened the era of inflation-targeting, central banks around the world are undershooting their consumer-price goals, but rather than lowering their sights to make things easier, the misses have fanned calls for targets to be increased. The most prominent proposal came from International Monetary Fund economists, who have suggested 4 percent as a new normal to prevent interest rates from being stuck too close to zero…

Two Percent ‘Makes Sense’ as Central Banks Fight Low Inflation

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